Despite the negative connotations associated with the term ‘Trust Fund Baby’, the concept itself is quite novel in its ability to safeguard assets before being directed in a prescribed manner to the right beneficiary. In simple terms, a trust is an entity that maintains assets, such as stocks, bonds, cash, real estate, and more, on behalf of someone else, and is programmed to execute based on conditions.
A trust fund is essentially an estate planning tool that deals with the many complexities, considerations, and requirements of transferring wealth and inheritance. Whether you want to earmark assets to only be used for your kids’ education, or a lifetime trust where the trustee would have the discretion to disburse funds, and your kids have no say in the matter, there are various approaches to consider.
When it comes to financial planning, parents are often faced with a number of troubling questions and anxieties. While there are various ways to plan for contingencies and provide for your family financially if the worst ever comes into reckoning, there are still concerns regarding how the funds will be utilized, how beneficiaries will be assisted, and how the rough patches and uncertainties will be dealt with.
Fortunately, estate planning, and trust funds along with it, have undergone extensive evolutions over the past few years to perfectly accommodate the individual requirements and peculiarities of different families. You no longer have to worry about your 18-year-old becoming a millionaire as soon as the clock strikes midnight, and using the funds you’ve planned for their education to travel the world.
In this article, we explain how mechanisms can be built into trusts to ensure the funds are committed to the intended purpose.
Your Trust Can Specify How The Money Should Be Used, e.g. For Education
To answer the question — no, your children cannot use the money from your trust to pay for travel, at least not if you’ve explicitly stated what it needs to be used for.
An education trust fund can be set up for any child, or children under the age of 25, with the documentation of the trust clearly stating that its assets are to be used to pay for grade school, college, graduate school, or trade school education of the beneficiary. The trust can further specify how the funds are to be administered, along with the punitive measures for non-compliance with the terms.
Setting up an education trust essentially allows you to ring-fence certain funds, particularly for the purpose of your children’s education. Being irrevocable in its nature, such a trust stays safe from lawsuits, and any protracted legal claims, as the control of the assets rest firmly with the trustee, and away from the guarantor, who cannot be compelled to release the funds to settle any debts.
A trust is essentially a legal entity with its own constitution, which goes into great detail on how it needs to be managed, how, when, and to whom the funds are to be disbursed, apart from having a professional trustee, or experienced lawyer to take on the role of a trustee. With this, you can be certain that your funds will reach your children, and will be used as intended, for their higher education when the time arrives, and not on wasteful travel, or other frivolous expenditures.
How Trusts Work With Life Insurance & Other Payouts?
In fact, even payouts from a life insurance policy, coupled with other receivables in the event of death can be routed and held in an education trust for the beneficiary, safe from any creditors, payables, or lawsuits.
This can help provide a much-needed semblance of relief for guardians and guarantors, knowing that their children’s education remains safe, no matter what circumstances life throws at them.
Also referred to as an irrevocable life insurance trust (ILIT), it is used to own and manage a policy when the insured person is still alive, along with the distribution and management of proceeds following the event of their death.
Apart from a wide range of benefits such as avoidance of gift and estate taxes, and protection from creditors and lawsuits, ILITs offer plenty of options in terms of legacy planning and distribution control. With education being your top priority, you can draft extensive measures to ensure all, or a portion of the assets within the trust are aimed particularly in service of this goal.
Creating An Effective Education Trust
Creating a trust of such a caliber, with effective structuring, clear norms, and their enforcement remains the purview of seasoned estate lawyers, who can draw up guidelines, and the means of their execution to best suit the wishes and preferences of customers. Lawyers can also act as a trustee, and legal advisors to the estate, taking part in the execution of the will, if and when the situation does arise.
Most estate lawyers should be able to effectively guide guarantors in this regard, but the key issue remains trust, especially when it comes to the execution, guidance, and stewardship of the trust in question, often with little-to-no oversight. This is why choosing a reputed law firm, specializing in estates, and at least a few decades of experience is ideal, in order to have some peace of mind.
While most people go above and beyond to safeguard their families after they are gone, they often fail to plan the aftermath of how the funds are received, how they are disbursed and ultimately used. Trust remains the perfect answer to all such questions, given its remarkable flexibility, substantial legal protections, and adherence to codified rules and norms.
With an iron-clad trust in place, you can be absolutely certain that your hard-earned money works as intended, to fund the higher education of your kids, and not to pay off debts, expensive purchases, and other nefarious activities of the bad apple in the family.